The Federal Reserve raised interest rates by 75 basis points -- the biggest increase since 1994 -- and Chair Jerome Powell signaled another big move next month, intensifying a fight to contain rampant inflation.
Slammed by critics for not anticipating the fastest price gains in four decades and then for being too slow to respond to them, Powell and colleagues on Wednesday intensified their effort to cool prices by lifting the target range for the federal funds rate to 1.5% to 1.75%.
He said another 75 basis-point hike, or a 50 basis-point move, was likely at the next meeting of policy makers. They forecast interest rates would rise even further this year, to 3.4% by December and 3.8% by the end of 2023.
“Clearly, today’s 75 basis-point increase is an unusually large one and I do not expect moves of this size to be common,” he told a post-meeting press conference in Washington, remarks that were cheered in financial markets as he took the risk of a string of super-sized increases off the table.
Stocks climbed, Treasury yields tumbled and the dollar pushed lower. Economists at Barlcays Plc said the expect the Fed will only raise rates by a half point next month.
Even so, the move on Wednesday was more hawkish than the 50 basis point shift previously signaled by the chair, who explained the change in tack by pointing to a run of data that showed inflation and expectations for it accelerating.
Late last week, a survey from the University of Michigan showed consumer inflation expectations pushing higher. Respondents anticipated inflation rising 5.4% in the year ahead, the highest since 1981. Longer-term price expectations also picked up.
The preliminary June readings were “quite eye-catching, and we noticed that,” Powell said. “One of the factors in our deciding to move ahead with 75 basis points today was what we saw in inflation expectations” in addition to the hotter-than-expected rise in the consumer price index for May.
While the median prediction of officials was for a peak rate of 3.8% in 2023, five forecast a federal funds rate above 4%.
five forecast a federal funds rate above 4%; the median projection in March was for 1.9% this year and 2.8% next. Traders in futures markets were betting on a peak rate of about 4% ahead of the release.
The Fed reiterated it will shrink its massive balance sheet by $47.5 billion a month -- a move that took effect June 1 -- stepping up to $95 billion in September.
What Bloomberg Economics Says
“The most notable change in the policy statement is the omission of the phrase ‘the committee expects inflation to return to its 2% objective,’” said Bloomberg economists Anna Wong, Yelena Shulyatyeva, Andrew Husby and Eliza Winger. “That suggests the FOMC sees price pressures persisting, and has grown more alarmed about the potential unmooring of inflation expectations.”